The peso currency closed down 2.1 percent in informal trade between foreign exchange houses, as measured by Reuters, to 3.2375/3.2425 per dollar ARSB=, suffering its biggest one-day loss since November 2003.

That marked its lowest level since mid-May, when protests by farmers upset local financial markets.

In interbank trade, which is heavily regulated by the central bank, the currency fell 1.1 percent to close at 3.1950/3.1975 per dollar ARS=RASL, levels not seen since May 2002.

“The central bank is pumping dollars in the market, but demand is strong and everything is being absorbed,” the foreign exchange trader.

RATES HIKED

The central bank also raised interest rates on short-term loans to banks BCRA05 by 75 basis points in a bid to help banks retain deposits in pesos and continue lending amid global market turmoil.

A source at a private bank operating in Argentina said although there are no liquidity problems now, investors are expected to withdraw money from the fixed-term deposits to invest in the strengthening dollar.

Another financial-sector source said the central bank set the tone because if one individual bank were to raise its interest rates, rumors would fly that it was suffering a run on deposits. This way, banks can raise rates if they like and help stem the depreciation of the peso.

The central bank also expanded its automatic, daily buybacks of notes and bills to 50 percent to boost liquidity in the market. (Reporting by Walter Bianchi and Hilary Burke; Editing by Helen Popper and Leslie Adler)